Hospitals’ finances improve somewhat in 2010

It was a good but not great year for three of the four largest hospital systems operating in the Indianapolis area last year—and hospital analysts are expecting several head winds to continue.

All four major hospital systems saw their revenue from patients rise, according to financial results dribbling out to the hospitals’ bondholders. But their income from operations was mixed, as hospitals grapple with high unemployment around the state and pressure on the reimbursement payments they receive from health insurance plans.

Those challenges aren’t going away anytime soon, according to a 2011 outlook for not-for-profit hospitals issued by New York-based Fitch Ratings.

“Hospitals and health care systems will continue to face a continuing weak economy and negative pressure on reimbursement rates, which could lead to negative rating activity,” said Jim LeBuhn, a hospital credit analyst at Fitch, in a January forecast.

It’s difficult to compare the finances of the four largest systems in the Indianapolis area because they report their financial results at different times and according to different fiscal calendars.

Franciscan Alliance, based in Mishawaka, and Indianapolis-based Indiana University Health reported their year-end results in February and March, respectively. Indianapolis-based Community Health Network has reported results through September 2010, but not yet for 2010’s final quarter. And Indianapolis-based St. Vincent Health has reported only through June 30, the end of its last fiscal year.

But the reports give a good idea of how each system is performing.

Franciscan and IU Health appear to be enjoying the most success lately.

Franciscan grew its net patient revenue 4.6 percent in 2010, to $2.1 billion, and boosted its operating income 6.2 percent, to $122.5 million. The hospital system had enough cash at year’s end to fund 312 days of operations—far above the industry gold standard of 200 days of cash on hand.

Franciscan’s three Indianapolis-area hospitals—in Beech Grove, on the south side of Indianapolis, and in Mooresville—are the most profitable bunch in the 13-hospital chain. Those three hospitals and their myriad outpatient facilities recorded an operating margin—the not-for-profit equivalent of a profit margin—of about 12 percent last year, more than double Franciscan’s overall margin.

Jenn Marion, Franciscan Alliance’s chief financial officer, said the hospital system would invest in more outpatient facilities, such as the mostly outpatient and imaging facility Franciscan plans to open in Carmel early next year.

Also, Franciscan has been acquiring physician practices, boosting its staff of employed doctors from 450 two years ago to 550 now and to as many as 630 by year’s end.

“Franciscan Alliance has been expanding the number of access points for our integrated delivery system, which has led to an increase in outpatient revenues for 2010,” Marion wrote in an e-mail.

IU Health also has been growing through acquisition, boosting its patient revenue last year 15 percent, to $4.1 billion, as it enjoyed a full year of additional revenue from its acquisitions of hospitals in Bloomington, Hartford City, Muncie and Paoli.

IU Health also has found its greatest success in the Indianapolis area. Its share of the inpatient market here reached 39.5 percent in 2009, up from 35.3 percent in 2005, according to a November report from Moody’s Investors Service, which includes only the four major hospital systems in the city.

According to Moody’s, St. Vincent Health claimed 25 percent, Community Health Network held 22 percent, and Franciscan had 14 percent.

Referring to IU Health by its previous name, Clarian, Moody’s analysts Lisa Martin and Beth Wexler wrote, “Clarian has implemented an aggressive strategy to grow its market presence in Indianapolis and throughout the state of Indiana that has resulted in meaningful market-share growth and very good volume growth at a time when many health systems nationally are facing flat or declining volumes as a result of the economy.”

But IU Health’s growth hasn’t come without cost. Its days of cash on hand is about half what Franciscan’s is—something that concerns bond rating agencies like Moody’s and Fitch.

“Our days cash position is significantly improved over 2008, when the global financial crises occurred,” wrote IU Health CFO Marvin Pember in an e-mail. “We are making progress in achieving days of cash reserves exceeding rating agency targets for top-rated health systems [of plus-200-days cash]. It is especially important that IU Health have a strong balance sheet to support our charity care and community investment efforts, and in anticipation of an increasingly uncertain reimbursement environment.”

In spite of Franciscan’s and IU Health’s recent growth, St. Vincent Health is still the most profitable hospital system of the four. Its operating margin in the year ended June 30 was 8.8 percent—compared with about 6 percent at Franciscan, about 5 percent at IU Health, and about 3 percent at Community Health Network.

But St. Vincent’s operating income fell 10 percent in its most recent fiscal year, to $158 million. Its patient revenue grew just 2 percent, to $1.8 billion.

Community Health’s revenue rose less than 2 percent, to $963 million, in the first nine months of 2010, compared with the same period the year before. Operating income fell 4 percent, to $25 million, during the period, as inpatient admissions dipped, unpaid bills and charity care rose, and unemployment led to fewer patients’ paying with commercial health insurance and more relying on the state-run Medicaid plan.

Ed Abel, a hospital accountant at Indianapolis-based Blue & Co., said the shift from commercial plans, which pay hospitals pretty well, to Medicaid, which pays them well below cost, has really crimped hospital profits.

“That to me is one of the biggest issues that we’re seeing in just about every hospital in Indiana,” Abel said. He added that uncertainty about the 2010 health care reform law and tighter credit markets recently will keep hospitals on their toes.

“It could be a very challenging year for hospitals,” he said.•